Chapter 16—PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Accounting Theory: 8th edition Page 1 of 13
TRUE/FALSE
1. Previous accounting standards have used a revenue-expense approach to pension accounting,
which emphasizes the recognition and measurement of annual pension cost.
2. In SFAS No. 87, the asset-liability orientation is evident in both expense measurement and the
balance sheet recognition of unfunded pension benefits.
3. Accounting for postretirement benefits is very different from pension accounting.
4. Accounting for defined contribution plans is more complex than accounting for defined benefit
plans.
5. In a defined contribution plan, benefits are defined either as a specific dollar amount or by a
general formula based on salary.
6. Benefits in a defined benefit plan may be paid either as a single lump sum amount at retirement
or as a life annuity.
7. For all defined contribution plans, funding is shared by the employer and employee.
8. Vesting refers to a qualifying period of pension plan membership that must be met before
contributions are made by the employer.
9. Benefits in a defined benefit plan may be based on either career average or final average salary.
10. Actuaries are often consulted to determine annual contribution levels for a defined contribution
plan.
11. There is a more even distribution of contribution levels when the projected benefit method is used
rather than the accumulated benefit method.
12. Actuarial funding methods related to pensions are identical to pension expense recognition
methods.
13. Prior to the existence of an accounting standard that addressed pensions, pension expense was
equated with cash contributions to pension funds.
14. SFAS No. 87 was the first accounting standard to argue that the cost of providing pension
benefits should be spread over the remaining service life of employees.
15. The fact that service giving rise to pension benefits occurred in the past was the main concern of
ARB 36.
16. ARB 36 reduced flexibility in how the cost relating to unfunded accumulated benefits was dealt
with in the income statement.
17. FASB Interpretation 3 was issued in response to the passage of ERISA.
18. ABP Opinion No. 8 was consistent with the revenue-expense approach.
19. SFAS No. 35 is considered a landmark standard because it set accounting and reporting standards
for a new entity, the pension plan, as separate and distinct from the sponsoring company.
20. SFAS No. 87 was the first pension accounting standard to segregate accumulated benefits into
vested and unvested benefits.
21. SFAS No. 87 is no longer in effect, having been replaced by SFAS 132.
22. SFAS No. 87 achieved greater uniformity in measuring accrued pension expense by mandating
use of one actuarial method, the accumulated benefit method.
23. In calculating the service cost portion of pension expense, future salaries need not be estimated.
24. SFAS No. 87 presumes an explicit contract in calculating accrued pension expense.
25. The disclosure requirements of SFAS No. 132 pertain to both pensions and OPEBs where
applicable.
26. Prior research studies have provided evidence that a firm’s unfunded pension benefits are
interpreted as if they are liabilities.
27. With an accumulated benefit approach, the discount rate includes a general inflation factor.
28. Prior to SFAS No. 106, OPEB had been handled on a cash basis of accounting.
29. The main change brought about by SFAS No. 158 was to bring the overfunded or underfunded
status of a defined benefit plan to the footnotes of the balance sheet.
30. Legal services and day care benefits are not included in OPEBs.
31. The FASB took an enormous step in SFAS No. 106 by requiring the recognition and
measurement of OPEB costs and obligations.
32. The core of SFAS No. 106 is the need to predict future health care costs.
33. The assumption that OPEBs are part of the total compensation package for covered employees
clearly stamps them as being attributable to past transactions or events.
34. SFAS No. 106 requires a liability be recognized related to OPEB only if a legal obligation exists.
35. If OPEB levels are based on wages, they should reflect those in effect at the current time rather
than an estimate of expected future wage levels.
36. SFAS No. 112 applies to both inactive and active employees who have not yet retired.
37. SFAS No. 112 requires that postemployment costs be handled on an actuarial basis.
38. Financial statement preparers strongly opposed OPEB recognition.
39. A shift toward the asset-liability orientation is evident in pension reporting requirements, with
both expense measurement and the requirement to recognize a minimum balance sheet liability
for unfunded pension benefits.
40. Currently, pension funds can be diverted from older employees toward younger employees
through cash balance plans.
41. Membership in defined benefit plans is declining relative to membership in defined contribution
plans.
Chapter 16—PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Accounting Theory: 8th edition Page 5 of 13
MULTIPLE CHOICE
1. What was the first pension accounting standard?
a.
FASB Interpretation 3
b.
ARB 36
c.
SFAS No. 87
d.
ERISA
2. Which of the following is not a characteristic of a defined contribution plan?
a.
The exact value is unknown prior to retirement.
b.
Mandatory contributions must be made to a pension fund.
c.
Contribution rates are normally stated as a percentage of wages or salaries.
d.
Actuaries are consulted to determine annual contribution levels.
3. Which of the following is not a characteristic of a defined benefit plan?
a.
The employee makes all contributions to the plan.
b.
Benefits may be paid as a single lump sum amount at retirement date.
c.
Benefits can be based on career average salary.
d.
In all cases, the value of pension benefits is directly related to the employee’s years of
service.
4. Vesting refers to:
a.
A qualifying period of pension plan membership that must be met before contributions are
made by the employer.
b.
A qualifying period of pension plan membership that must be met before pension benefits
legally exist.
c.
A qualifying period of pension plan membership after which benefits are received.
d.
A qualifying period of pension plan membership after which contributions may cease.
5. Which of the following statements does not apply to a multiemployer pension plan.
a.
It is subject to collective bargaining agreements.
b.
Two are more employers are plan sponsors.
c.
There are no regulatory differences between these plans and single-employer plans.
d.
One employer can contribute no more than 50 percent of initial contributions.
Accounting Theory: 8th edition Page 6 of 13
6. Which of the following is a true statement regarding actuarial funding?
a.
Actuarial funding applies to both defined benefit and defined contribution plans.
b.
Given the same set of plan conditions and actuarial assumptions, each different actuarial
funding model derives the same funding pattern over time.
c.
Given the same set of plan conditions and actuarial assumptions, each different actuarial
funding model builds up a pension fund to the same future balance.
d.
Actuarial funding is synonymous with terminal funding.
7. When a pension plan commences, credit is often granted to employees for past years of service,
giving rise to what is called:
a.
Unfunded past service cost.
b.
Unfunded benefits.
c.
Unfunded actuarial liability.
d.
All of the above
8. Benefit improvements give rise to:
a.
Prior service costs.
b.
Past service costs.
c.
Actuarial service costs.
d.
Benefit improvement costs.
9. In applying actuarial funding methods, actuaries make assumptions about all but which of the
following?
a.
Future withdrawals from the plan
b.
Acceptable levels of actuarial gains or losses
c.
The effects of future salary levels on the value of expected retirement benefits
d.
The rate of interest to be earned on pension fund investments
10. Which one of the following statements does not apply to ERISA?
a.
It was a landmark piece of social legislation.
b.
It allowed the “rule of 45” be used as an alternative vesting formula.
c.
It required unfunded accumulated benefits to be funded over a maximum of fifteen years.
d.
It contained requirements related to investment diversification.
11. Which of the following was not an objective of ERISA?
a.
To improve access to pension benefits for employees
b.
To extend vesting periods
c.
To override discretionary funding clauses in pension plans
d.
To improve the security of pension benefits for employees
12. Which one of the following would not be a party to a defined benefit plan?
a.
The sponsoring employer
b.
A pension fund
c.
The employee
d.
The actuary
13. What of the following is not a true statement regarding the Pension Benefit Guaranty
Corporation (PBGC)?
a.
The PBGC has a statutory lien against the sponsor for 100 percent of shortfalls in vested
benefits.
b.
The PBGC was created by ERISA as a national insurer of pension plans.
c.
Vested benefits of participants are partially guaranteed by the PBGC if a plan is
terminated.
d.
The PBGC is empowered to collect premiums from plans to pay for guaranteed
termination benefits.
14. Which of the following is not a currently allowed practice related to pensions?
a.
The use of cash balance plans
b.
Redistributing benefits away from older employees and shifting them to younger
employees
c.
The raiding of overfunded pension plans by acquiring corporations
d.
Discretionary funding of defined benefit plans
15. Which of the following statements applies to a voluntary termination?
a.
The sponsor has a legal liability under ERISA for all accrued benefits.
b.
The sponsor has a legal liability under ERISA for all vested benefits but not for unvested
benefits.
c.
The sponsor has a legal liability under ERISA only for PBGC guaranteed benefits.
d.
None of the above statements apply to a voluntary termination.
16. Which of the following statements applies to an involuntary termination?
a.
The sponsor has a legal liability under ERISA for all accrued benefits.
b.
The sponsor has a legal liability under ERISA for all vested benefits but not for unvested
benefits.
c.
The sponsor has a legal liability under ERISA only for PBGC guaranteed benefits.
d.
None of the above statements apply to an involuntary termination.
Accounting Theory: 8th edition Page 8 of 13
17. Which of the following is not one of the three possible methods that could be used to account for
unfunded accumulated benefits under ARB 36?
a.
A prior period adjustment
b.
A component of operating income
c.
An extraordinary item of income
d.
Allocation over current and future periods
18. What was the main argument of ARB 36?
a.
ERISA did not create a pension liability except in the likelihood of plan termination.
b.
The cost of providing pension benefits should be spread over the remaining service life of
employees.
c.
Pension expense should be computed using any one of five acceptable accumulated
benefit methods, regardless of cash contributions.
d.
The balance sheet should report unfunded vested benefits.
19. What was the main argument of FASB Interpretation 3?
a.
ERISA did not create a pension liability except in the likelihood of plan termination.
b.
The cost of providing pension benefits should be spread over the remaining service life of
employees.
c.
Pension expense should be computed using any one of five acceptable accumulated
benefit methods, regardless of cash contributions.
d.
The balance sheet should report unfunded vested benefits.
20. What was the main argument of ARB 47?
a.
ERISA did not create a pension liability except in the likelihood of plan termination.
b.
The cost of providing pension benefits should be spread over the remaining service life of
employees.
c.
Pension expense should be computed using any one of five acceptable accumulated
benefit methods, regardless of cash contributions.
d.
The balance sheet should report unfunded vested benefits.
21. What was the main argument of APB Opinion 8?
a.
ERISA did not create a pension liability except in the likelihood of plan termination.
b.
The cost of providing pension benefits should be spread over the remaining service life of
employees.
c.
Pension expense should be computed using any one of five acceptable accumulated
benefit methods, regardless of cash contributions.
d.
The balance sheet should report unfunded vested benefits.
Accounting Theory: 8th edition Page 9 of 13
22. Which of the following accounting standards began a shift toward an asset-liability orientation in
pension reporting?
a.
APB Opinion 8
b.
SFAS No. 87
c.
SFAS No. 106
d.
SFAS No. 132
23. Which of the following is not a true statement regarding SFAS No. 35?
a.
It established accounting standards for the measurement and reporting of plan assets and
plan obligation.
b.
It was a landmark standard because it defined the pension plan as a new entity, separate
and distinct from the sponsoring company.
c.
It defined plan obligations as accumulated benefits, both vested and unvested.
d.
It required information about the sponsor’s obligations to be reported as a note in the
sponsor’s financial statements.
24. Which of the following is not a true statement regarding SFAS No. 87?
a.
It requires the recognition of a minimum pension liability when accumulated benefit
obligations exceed the fair value of plan assets.
b.
It has achieved greater uniformity in measuring accrued pension expense.
c.
It mandates the use of the accumulated benefit method.
d.
It uses service cost rather than normal cost.
25. Which of the following is a true statement regarding the pension liability and pension expense
recognition requirements of SFAS No. 87?
a.
SFAS No. 87 presumes an explicit contract in calculating accrued pension expense.
b.
SFAS No. 87 uses an explicit contract view in requiring the recognition of a minimum
pension liability.
c.
SFAS No. 87 may overestimate the pension liability by including future salary projections
in the liability computation.
d.
SFAS No. 87 does not include future salary projections in the pension expense calculation.
26. Which of the following is not true regarding SFAS 158?
a. It brought the overfunded and underfunded status of defined benefit plan to the footnotes of the
balance sheet.
b. It required certain costs be charged to other comprehensive income.
c. It requires a credit to other pension income for amortized prior service costs.
d. An overfunded or underfunded amount for OPEBs must be shown as an asset or liability on
the balance sheet.
27. Which of the following brought accrual accounting to post retirement benefits other than
pensions (OPEB)?
a.
SFAS No. 87
b.
SFAS No. 106
c.
SFAS No. 132
d.
ERISA
28. Which of the following is not true related to OPEBs?
a. Explicit health care trending makes OPEB accounting somewhat similar to the projected
benefit obligation approach to pensions.
b. Housing subsidies may be included in OPEBs.
c. SFAS No. 106 requires recognition of OPEB costs and obligations.
d. Prior to SFAS No.106, OPEBs were handled on an accrual basis of accounting.
ESSAY
1. Describe the two broad types of pension plans and identify how they differ from one another.
2. Explain in general terms how defined benefit pension plans are funded.
benefits arising from employee service to date. If so, any unfunded accumulated
benefits give rise to an accounting liability that should be recognized.
pension expense: is it simply the cash contributed to the pension fund, or is it a more
complex accrual based on the yearly increase in accumulated benefits?
to employee service to date are restricted to the accumulation of past contributions.
Accumulated benefits are fully funded by the sponsor as long as each year’s required
3. Identify the four major provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
4. Respond to the following:
a.
What are the two major accounting issues related to a defined benefit plan?
b.
Why do pension expense and pension liability recognition problems not arise with
defined contribution plans?
of service (subject to the requirement that vesting be 50 percent after ten years and
100 percent after fifteen years).
fifteen years.
However, the only specific requirement is to limit investments in the sponsoring
company to 10 percent of the total pension fund.
insurer of pension plans and empowered to collect premiums from plans to pay for
guaranteed termination benefits.
5. How is pension expense calculated under SFAS No. 87, and when is pension liability
recognized?
6. What have research studies indicated about whether a firm’s unfunded pension benefits are
interpreted as liabilities?
7. What were the major effects of SFAS No. 106 on reporting for post-retirement benefits other than
pensions?
8. What are the possible economic consequences of OPEB recognition?